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Notice of termination provisions - not all they're cracked up to be

29 April 2016. Published by Ed Holmes, Associate and Tim Brown, Partner

In Vinergy International (PVT) Limited v Richmond Mercantile Limited FZC the High Court held that the respondent had been entitled to accept the appellant's repudiatory breach and terminate their contract without complying with the notice requirements. 

There was no implied term that the notice provision applied to repudiatory breaches and, even if it did, the breach otherwise fell outside the scope of the notice provision.

Facts

In 2008 Vinergy, an Indian company, entered into a Master Supply Agreement (MSA) with Richmond, a UAE company, under which Richmond agreed to supply bitumen to Vinergy for 10 years. Over the next four years Richmond supplied 39 shipments until various disputes developed between the parties which resulted in Richmond terminating the agreement in July 2012.In August 2012 Richmond commenced arbitration proceedings for damages arising from what it considered were three repudiatory breaches by Vinergy, namely: 

  • a breach of its obligation to buy bitumen exclusively from Richmond;
  • its failure to pay an invoice for almost a year; and
  • its failure to pay demurrage fees for certain shipments. 

Vinergy, however, claimed that Richmond had terminated the agreement unlawfully. Vinergy argued that when Richmond terminated the MSA it had failed to give notice in accordance with clause 17.1.1 which provided that either party could terminate the agreement immediately upon:

 "failure of the other party to observe any of the terms herein and to remedy the same where it is capable of being remedied within the period specified in the notice given by the aggrieved party to the party in default, calling for remedy, being a period not less than twenty (20) days".

 Vinergy argued that Richmond's failure to give notice in accordance with this provision meant that its termination was unlawful and a wrongful repudiation of the MSA.

 The tribunal upheld Richmond's claims and awarded damages for all three repudiatory breaches. It did not accept that Richmond had unlawfully terminated the agreement. Although Richmond had only given notice to remedy on 2 July 2012 and then terminated the agreement on 20 July (which was less than the 20 days' notice to remedy under clause 17.1.1), this was of limited relevance since Richmond also had common law rights to terminate on the grounds of a repudiatory breach and those rights were expressly preserved by clause 18 of the MSA which provided that:

 "Termination of this Agreement, including but not limited to Termination in accordance with clause 17, will not prejudice the rights of action or remedy of [Vinergy] or [Richmond] in respect of any antecedent breach by the other party of any of such party's obligations under this Agreement."

 Vinergy appealed against the tribunal's decision, arguing that its finding that Richmond's termination was lawful was wrong in law.

 The law

At common law, where a party to a contract commits a breach that is sufficiently serious, the innocent party may choose to accept that breach by giving notice to the other party. The agreement is then terminated and the innocent party can claim damages. This is known as a repudiatory breach.

 Issues

The key issue for the court to determine was whether Richmond was able to rely on an unhindered common law right to terminate the MSA by reason of a repudiatory breach so as to completely bypass the notice and remedy requirements in the termination clause.

 Vinergy accepted that the MSA did not exclude the common law right to terminate for repudiatory breach but argued that such right, if exercised, had to be exercised in the manner set out in clause 17. In other words, it argued that where a contract provides for notice to be given before it could be terminated, that notice also applied to the right to terminate at common law.

 Richmond disagreed and also argued that, in any event, clause 17 only applied to breaches which were not remediable and at least one of the repudiatory breaches was not capable of being remedied.

 Decision

The court dismissed Vinergy's appeal.

 It noted that there was nothing in clause 17.1.1 which expressly referred to the right of a party to accept a repudiatory breach as terminating the MSA. The question was, therefore, whether one could imply into the clause an agreement that before a party terminated the MSA, whether pursuant to the clause or pursuant to the common law, the party had to follow the notice procedure laid down in clause 17.1.1. The court held that no such agreement could be implied for the following reasons:

 There was no mention in clause 17.1.1 of the common law right to accept a repudiatory breach as terminating the MSA. The right to terminate was said to be dependent on the "failure… to observe any of the terms herein". Such a failure could be major or minor in terms of seriousness.

  • Clause 17 as a whole provided six separate rights to terminate of which clause 17.1.1 was only one. For example, the requirement to give at least 20 days' notice to remedy did not apply to the right to terminate where there was an insolvency event. Accordingly, it could be inferred that clause 17.1.1 was only intended to apply to the specific right to terminate found in clause 17.1.1 and not to any of the other express rights to terminate or the right at common law to accept a repudiatory breach as terminating the contract. Clause 18 (noted above) made clear that however the MSA was terminated, rights of action in respect of any prior breach remained unaffected by termination. That was consistent with the position at common law.

 Accordingly, clause 17.1.1 did not apply when an innocent party sought to exercise its right at common law to accept a repudiatory breach as terminating the MSA.

 Vinergy sought to rely on various authorities including Lockland Builders v. Rickwood (1995) 46 Con LR 92 (CA)in which the Court of Appeal held that an innocent party to a breach of contract had to comply with the termination provisions to bring the contract to an end.

 However, the court noted that this was because the breach in question fell squarely within the scope of the notice clause. Notice of breach would not have been required in respect of a repudiatory breach which fell outside the scope of the clause.

 The court also found that the authorities on which Vinergy was relying were of limited assistance because they all involved differently drafted terms. In Stocznia Gydinia SA v Gearbulk Holdings Ltd. [2010] QB 27 the Court of Appeal did not regard Lockwood Builders v Rickwood as laying down any general principle.

 If, however, the court was wrong and the authorities did express a principle which could be applied to this case, it was that a clause requiring notice to remedy only applies to breaches within the scope of the clause. Clause 17.1.1 only applied to breaches which were capable of being remedied, so the question was whether the breaches in question were capable of being remedied.

 Richmond accepted that the failures to pay the invoice and the demurrage fees were remediable. The court also seemed to be open to the suggestion that the third breach, the breach of exclusivity caused by Vinergy entering into a secret contract to buy cargo from another supplier, was also capable of remedy. However, the tribunal had concluded it was not and Vinergy had no ability to challenge that conclusion.

 Accordingly, even if clause 17.1.1 had applied to repudiatory breaches which were capable of remedy, it could not apply to the breach of the exclusivity provision because that breach was not capable of remedy. Richmond had therefore been entitled to accept Vinergy's repudiatory breach of exclusivity as terminating the contract without the need to give Vinergy 20 days' notice to remedy it.

 Comment

  1. This decision was dependent on the specific drafting of the termination clause in question and the nature of the breaches but if the parties to a contract intend the termination provisions to apply to a repudiatory breach at common law, they would be well advised to make this expressly clear in the drafting of those provisions.

  2. If a party is considering terminating a contract for repudiatory breach, they will need to consider carefully whether the contractual termination provisions apply to that breach.